Finland’s Outlook Cut to Negative at S&P on Sub-Par Growth

A Finnish national flag flies from a residential apartment block near balconies in Helsinki. Photographer: Ville Mannikko/Bloomberg

April 11 (Bloomberg) -- Finland faces a one-in-three chance
its AAA credit rating will be cut over the next two years,
Standard & Poor’s said, citing lackluster demand that’s
thwarting government efforts to halt debt growth.

Finland’s long-term AAA rating was affirmed while the
outlook was cut to negative from stable, the credit-rating
company said in a statement today. The economy will grow on
average 1 percent in 2014 to 2016, S&P said, lowering its
previous projection of 1.4 percent.

Finland’s manufacturing engine is faltering as erstwhile
top exporters in forestry and the Nokia Oyj-led technology
industry struggle with falling demand and increasing
competition. The government last week lowered its economic
growth forecast for 2014 to 0.5 percent from 0.8 percent, in
part as sanctions against Russia now threaten its nascent
recovery. About 10 percent of Finnish exports go to Russia.

“The economy remains vulnerable to any slowdown of
economic activity in the euro area or among other major trading
partners, such as Russia,” S&P said.

Government Response

“Finland’s problems are the result of a failure to
undertake structural reforms over the past 15 years,” Prime
Minister Jyrki Katainen said on his way to parliament today.
Nokia’s strength in the early 2000s may have masked Finnish
weaknesses, he said. “The debt crisis has exposed all these
weaknesses and we’ve now taken action to rectify them.”

The spread between 10-year Finnish bond yields and similar-maturity German debt widened 1 basis point to 31 basis points at
9:57 a.m. in Helsinki.

The outlook cut “puts more pressure on the already shaky
government and will deliver a hit to Finnish bonds, very
dependent on the highest ratings,” Jan von Gerich, Helsinki-based analyst at Nordea Bank AB, wrote in a note to clients.
“Recent decisions taken by the government on further austerity
and structural measures have clearly not convinced S&P.”

The government has responded with a 9 billion-euro ($12.5
billion) package of long-term measures designed to help it pay
for its aging population. It’s also pushed through 6.8 billion
euros of spending cuts and tax increases since 2011 to protect
its credit rating during Europe’s debt crisis.

Government Exit

The ruling coalition shrank to five parties last month
after the Left Alliance exited in protest against further
austerity. Katainen said last week he will step down in June to
pursue top positions outside Finland and Finance Minister Jutta
Urpilainen faces a leadership challenge next month within her
party. S&P said it doesn’t expect Katainen’s resignation to lead
to “any substantial deviation” from current policies.

Finland’s general government debt will breach the European
Union’s 60 percent of gross domestic product rule next year,
after reaching 59.8 percent in 2014, the Helsinki-based Finance
Ministry estimates.

S&P has rated Finland’s debt AAA since Feb. 1, 2002, even
as it placed the rating on watch for a downgrade for about a
month in December 2011 amid the European debt crisis. Since
then, Finland’s rating had a negative outlook until January
2013.

Investor Response

In the euro area, Germany, Luxembourg and Finland have AAA
ratings at S&P after Netherlands lost its AAA grade in November.
Some investors shrug off ratings actions, as evidenced by the
short-lived market impact of Standard & Poor’s downgrade of the
U.S. in 2011.

Finland remains one of the best sovereigns and any notable
move on Finnish bonds following the outlook cut is an
opportunity to buy, Michael Michaelides, a fixed-income
strategist at Royal Bank of Scotland Group Plc, wrote in a note
to clients. Finland ranks only marginally lower than Germany in
RBS’s rating index, he said.

Fitch Ratings affirmed Finland’s rating on March 28, citing
the nation’s “prudent” track record in fiscal and
macroeconomic policy. Geopolitical tensions in Russia and a
failure to address the impact of an aging population and lower
growth on public finances pose potential future risks, it said.
Moody’s last affirmed Finland’s Aaa on May 29, 2013. Fitch and
Moody’s have a stable outlook on Finnish sovereign debt.

S&P said the negative outlook reflects at least a one-in-three chance of a one-level rating downgrade in the next 24
months “should no clear signs emerge that Finland’s negative
economic and fiscal debt trends are being reversed.”